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Inequality and Poverty. Jonathan Shaw Motivation. Why care about inequality or poverty? Intrinsic (ethical) reasons Functional reasons – for example: Impact of deprivation on later-life outcomes Impact of inequality on growth. Measurement.

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inequality and poverty

Inequality and Poverty

Jonathan Shaw

  • Why care about inequality or poverty?
  • Intrinsic (ethical) reasons
  • Functional reasons – for example:
    • Impact of deprivation on later-life outcomes
    • Impact of inequality on growth
  • How do we measure living standards?
    • We will focus on income
  • Income over what time period?
    • Snapshot at a point in time
  • What income?
    • Net income
    • Consider both BHC and AHC income
measurement continued
Measurement (continued)
  • Whose income?
    • Consider household income
  • Different needs?
    • Equivalisation of income
  • Where do the data come from?
    • Household surveys: FRS and FES
the income distribution 2002 03
The Income Distribution 2002/03
  • Features of distribution
    • Distribution is highly skewed
    • Around two-thirds of individuals have incomes below mean
    • Long tail: 2% of individuals have incomes above £1,100
  • Where do you fit in?
where do you fit in
Where do you fit in?
  • If I live on my own and have net monthly income after council tax of £1,500 then I am in 83rd percentile
  • Suppose my net income after council tax is £900. Then I am in 49th percentile
  • Suppose income is £1,500 but I have a partner and two young children. Then I am in 34th percentile
the gini coefficient
The Gini Coefficient
  • Bounded between zero (complete equality) and one (complete inequality)
  • Treats deviations from equality the same regardless of where the occur within income distribution
  • Net income Gini is typically between 0.25 and 0.35 for developed countries
explaining the change in inequality
Explaining the change in inequality
  • Changing labour market participation
    • Decrease in male participation mainly in households where there are no other workers
    • Increased female participation among those with working partner
    • Led to increased polarisation between two-earner and zero-earner households
explaining the change continued
Explaining the change (continued)
  • Increasing skills premium
    • Skill-biased technical change
    • International trade and the Stolper-Samuelson theorem
  • Institutional factors
    • Decline in role of trade unions
    • Wages policies and Wages Councils abolished
    • Equal pay act
    • National Minimum Wage
explaining the change continued1
Explaining the change (continued)
  • Demographic changes
    • Later marriage, fewer children, higher divorce
    • More single-person and lone parent households
  • Tax and benefit changes
    • Estimated impact of tax and benefit reforms depend on counterfactual
    • But income tax cuts of 1980s increased inequality, while direct tax rises and means-tested benefits in 1990s reduced inequality
inequality under labour
Inequality under Labour
  • Since Labour came to power inequality (measured by Gini) has continued to rise
  • And since 1998/99, (BHC income) inequality is higher than at any point since 1961
  • Increase in inequality has occurred despite redistribution of Government
  • Examine entire distribution to see how income growth varies
effect of tax and benefit reforms
Effect of tax and benefit reforms
  • What effect have recent tax and benefit changes had on inequality?
  • Consider what would have happened to incomes had the tax and benefit remained unchanged
  • Use simulation techniques to calculate income series under uprated April 1996 system
simulated and actual gini1
Simulated and Actual Gini
  • Since 2000/01 there has been a departure between the actual Gini and that simulated under April 1996 system
  • Tax and benefit changes therefore worked to reduce extent of inequality
  • Suggests the underlying distribution has become more unequal
  • Often measured by proportion of individuals below a poverty line
  • Relative and absolute poverty measures
  • Ignores more direct ‘deprivation’ measures
child poverty under labour
Child Poverty Under Labour
  • Labour targets (relative to 1998/99):
    • A quarter lower by 2004/05
    • Halved by 2010 and eradicated by 2020
  • So by 2004/05:
    • AHC poverty must be 3.2m (from 4.2m in 1998/99)
    • BHC poverty must be 2.3m (from 3.1m in 1998/99)
  • Poverty in 2002/03: 3.6m AHC and 2.6m BHC
  • But figures do not yet include child tax credit
why did poverty fall and at the same time inequality rise
Why did poverty fall and at the same time inequality rise?
  • Poverty has not fallen for all groups since Labour came to power
    • But it has fallen for the population as a whole
  • Poverty and inequality are two different concepts that are measured differently
    • Bottom catching middle, top pulling away
  • Inequality and poverty are relevant for intrinsic and functional reasons
  • Difficult measurement decisions have to be made
  • Inequality is high relative to other countries
  • Inequality and poverty rose during 1980s
  • Child poverty has fallen over recent years
  • Brewer, Goodman, Myck, Shaw and Shephard (2004), ‘Poverty and Inequality in Britain: 2004’,
  • Brewer and Gregg (2001), ‘Eradicating Child Poverty in Britain: Welfare Reform Since 1997’,
  • Clark and Leicester (2004), ‘Inequality and Two Decades of British Tax and Benefit Reform’, Fiscal Studies, Vol 25 No 2
  • Goodman and Shepherd (2002), ‘Inequality and Living Standards in Great Britain: Some Facts’,
  • Ray (1998), ‘Development Economics’, chs 6-8